Search to keep Yahoo earnings upbeat

Yahoo on Wednesday will open earnings season when it reports its second-quarter financial results and provides a litmus test of the health of online advertising.

The Web portal is expected to report earnings of 8 cents per share on revenue of $610 million, according to Thomson First Call's consensus of analyst estimates. As in its previous few quarters, Yahoo will highlight revenue excluding traffic acquisition costs from its Overture Services division. The cost is the amount of money that Yahoo pays its Overture partners to host its commercial search results.

Including the traffic acquisition costs, Yahoo's gross revenue is expected to be in the $800 million range, according to one financial analyst.

"The data points that we've gathered have all pointed toward healthy demand for online advertising," Derek Brown, an analyst at Pacific Growth Equities, said in an interview. "I think Overture continues to show momentum for paid search."

Analysts will also look for signs of improvement in display advertising, or graphical banner and interactive ads. Some analysts do not expect that business to grow as rapidly as its previous two quarters. Yahoo stopped breaking out performance metrics in its display advertising.

Mark Mahaney, an analyst at American Technology Research, expects nonsearch advertising to grow 24 percent from last year, down from 34 percent last quarter (which included a $10 million one-time event) and 27 percent during the fourth quarter of 2003. Still, Mahaney expects a good future for display ads.

"What's not well-known is the potential for branded advertising to pick up this year," he said. "That's where there could be positive surprises."

Challenges and changes
For Yahoo, change was the word last quarter, and the one word that sparked these changes was Google. Yahoo in June launched a redesign of its Web e-mail service and boosted free accounts from 4MB of memory to 100MB. The actions were an attempt to pre-empt the launch later this year of Google's free e-mail service, Gmail, which will premiere with 1GB of storage for every account.

The company also began offering a glimpse of a new home page design, which emphasizes its search engine and simplifies its layout. Yahoo is testing a number of new designs to solicit feedback for its eventual launch later this year.

Wall Street will pay attention to other areas, such as Yahoo's fees division, which makes the bulk of its nonadvertising revenue, and its listings division, represented by its HotJobs subsidiary.

Semel in May raised the bar on its paying subscriber target from 10 million to 15 million, though he did not say when or how he would reach this mark. Last quarter, Yahoo reported 5.8 million paying customers, most from its Internet access deal with SBC Communications. The business jumped 39 percent from last year, to $88 million, but only grew 3 percent from the previous quarter.

Analysts are not expecting significant gains from HotJobs, which has remained stagnant over the past few quarters.